Financial advisers say North Asia has remained a bastion of hope for junior miners searching for money to back their projects amid a renewed credit crunch in North America and Europe.
Last month, during Premier Christy Clark’s trade mission to China, Deloitte’s global mining team delivered a presentation to B.C. and Asian business leaders about how North Asian financiers could help develop new mines in Canada’s western-most province.
China, Japan and South Korea represent a strong source of funding for mining companies that have quality exploration-stage projects but lack the finances to advance them to production, according to Deloitte.
Deloitte is so confident in the North Asian opportunity that it has moved its global mining mergers and acquisitions leader, Jeremy South, to Beijing from Vancouver.
Glenn Ives, Deloitte’s chairman in Canada, said North Asian funding sources have become even more important in recent months as equity markets in North America pull back and European banks contend with an expanding sovereign debt crisis.
The situation is of specific interest to Vancouver’s mining cluster, which is home to more than 800 junior companies, many of which are considered high-risk investments.
“The credit markets have shut them out. There is no credit or project debt from western banks, the credit crunch has made sure of that, and the equity markets aren’t overly open to them [either],” said Ives. “So the place we’ve seen people going is North Asia.”
The Toronto Stock Exchange’s global mining index has dropped 30% this year, while the number of financings on the benchmark index dropped 81% by September compared with last year.
The worsening global situation has had an immediate effect on local companies, forcing them to cancel financing deals or reduce the size of them.
Formation Metals (TSX:FCO), for example, said last month its US$79.5 million credit agreement with European bank BNP Paribas had been terminated, threatening to sideline its flagship cobalt project months after construction began.
Yet in the midst of the doom and gloom, Ives argued that North Asia presents an opportunity that’s unique to the junior mining sector.
Specifically, investors there have taken a long-term view of the commodity cycle, he said, and recent market slumps are unlikely to deter them from securing the raw materials they need to keep their economies humming.
Add to that the fact that Asian investors are increasingly moving away from takeover deals in favour of joint-venture agreements, and Vancouver’s junior companies are in a strong position to sign deals that could keep them afloat for the long term.
Ives said joint-venture deals are becoming increasingly common because Asian investors are more interested in securing resource supply than operating mines.
That leaves junior companies in a position to land the financing they need to develop a project while retaining operational control of it.
A prime example of this type of arrangement was Vancouver-based Capstone Mining’s (TSX:CS) $725 million deal earlier this year to buy and, with it, finance the development of the Santo Domingo copper project in Chile.
The deal represented a partnership between Capstone and Korea Resources Corp. (KORES), and would see KORES buy a 30% stake in Santo Domingo for $210 million and arrange financing to build Santo Domingo.
KORES has also agreed to buy half of all the copper and iron that Santo Domingo will one day produce.
“That is all of the money Capstone needs to fund their equity portion from now until production of Santo Domingo, so we’ve self-financed the operation bringing KORES in,” Capstone president and CEO Darren Pylot told Business in Vancouver earlier this year. “I feel good about that because we’ve taken away all the risk.”
Closer to home, local mining companies such as Abacus Mining & Exploration (TSX-V:AME), Copper Mountain Mining (TSX:CUM) and Compliance Energy (TSX-V:CEC) have signed joint venture or purchasing agreements with international partners.
But just because Asia needs the resources B.C. can produce, that doesn’t mean it will be easy for every local company to land financing.
“One myth that needs to be debunked is that Asians will buy at any price. That’s not true,” said Vanessa Iarocci, vice-president of PricewaterhouseCooper’s deals practice.
In fact, if Asian financiers invest in local companies, they’re only likely to do so if the project has been well explored, has proven resources and can be developed for a fair price.
Another issue B.C. companies need to grapple with is First Nations land claims.
Ives said land claim questions came up in every conversation with investors in Asia during the recent trade mission.
Tom Whelan, Ernst & Young’s Canadian mining leader, said the relationship between a company and the local population has recently become a key consideration in joint venture agreements.
“Besides what the ore body looks like, that will be the next thing– what’s the quality of your relationship with key stakeholders?” said Whelan. “That thinking needs to be accelerated in this day and age as all investors are really putting a lot more focus into that.” •
